Christmas Cash

Christmas is coming – and lots of kids will get the odd tenner or more from friends or relatives. If you can persuade them not to spend it, there are lots of useful ways it can be put to work to earn more money – and teach them about managing cash.

Savings accounts
Every child however young can have a bank or building society savings account. If they are under 7 (16 in Scotland) you have to open the account in your name on your child’s behalf. At seven they will be able to take control of it themselves. Take care when choosing a children’s account – some of them have gimmicks such as free money boxes or colouring books. But you normally pay for those through a lower interest rate or limits on what you can withdraw.

Paying the best rate of interest – and free of gimmicks or restrictions – is the Alliance & Leicester First Save account at 4.3%.You only need £1 to open it and you pay in and draw out at branches. Close behind is Nationwide paying 4% on its Smart-2-Save (up to 11) and Smart (11-16) accounts which also have a yearly magazine. Once a child reaches 11, Lloyds TSB’s Young Saver Bank offers 3.5% on an account with a cash card. It can also be operated by phone or on the internet. Alliance & Leicester also has a cash card account which will even let them set up standing orders and direct debits – but never go overdrawn. It only pays 2.75%.

Longer term
If you want a longer-term savings plan then National Savings & Investment has products that suit children. The Children’s Bonus Bond has to be kept for five years and £100 invested would grow to £120.50 at the end – the equivalent of 3.8% a year. You can invest from £25 to £1000 in the bond. You buy it their name – and they cannot get control of the money until they are 16. You can get a better rate over five years from NatWest. Its five Year Savings Bond is for anyone under 16 and is currently paying 4.2%

If you are concerned that inflation may rise you could buy index-linked National Savings Certificates instead – they pay 1.05% a year on top of whatever the annual rate of inflation is – currently it is 2.9%. The certificates have to be kept for at least five years and the minimum investment is £100. They have to be in your name until the child is seven.

Premium bonds remain popular, but the odds against winning are pretty high – 30,000 to one for each £1 bond in each draw. So if you buy the minimum £100 then you can expect to win only once every 250 years. If you have £2500 then on average you will get one prize a year. The top prize is £1 million but nearly all the prizes are £50. They really suit big investors who pay higher rate tax – if you invest the maximum £30,000 then you can expect a tax-free prize each month. Premium bonds have to stay in your name for the child until they reach sixteen. The gains on these NS&I products are tax-free, so neither you nor they have to worry about tax.

Government cash
All new babies are promised a savings boost by the government. The new Child Trust Fund will set up a savings account for every new born child. The government will put in £250 – or £500 if the parents are on a limited income – and then more at certain ages in the future. And friends and family can add money too – up to £1200 a year. The money has to stay in the account until the child is 18. scheme applies to any baby born from 1 September 2002 but will not start until 2005.

Tax free
Children get the same tax allowance as anyone else – so they do not pay tax if their income is less than £4615 in the year. If they have a bank or building society account then fill in form R85 for them to make sure that no tax is deducted from any interest they earn. At 16 they can fill in the form themselves.

Tax danger
If the money in a child’s account is from a parent – and it earns more than £100 interest – then the parent is taxed on it. There is a separate £100 limit on interest for gifts from each parent. This limit does not apply to gifts from anyone else such as grandparents.

Not so friendly
Friendly societies offer special children’s bonds – but beware. The charges are high, they are fixed for ten years, and all the money is at risk on the stock market. Some have performed disastrously and most advisers say – steer clear.

Safe at 50
If you really want to invest long-term for your child, why not take out a stakeholder pension in their name? Every pound you put into a stakeholder is topped up with tax relief worth 28p. Charges are only 1% a year or less. The pension fund is in your child’s name but they cannot touch it – under current rules – until they are 50.

December 2003

e-mail Paul Lewis on paul@paullewis.co.uk